The economy will be growing at close to its long-term potential by the end of the year, according to the Economic and Social Research Institute, write John McManus and Ciaran Brennan.
Although the average for 2002 will be only 3.1 per cent, growth will be about 5 per cent in the last three months of the year, according to the latest forecast from the Government-sponsored research body.
Last year, the economy grew by 4.9 per cent, but most of that took place in the first six months of the year. This year the situation will be reversed, with strong growth coming through in the second half provided the recovery in the global economy stays on track.
Growth will continue next year, when a 4.4 per cent rise is predicted in the value of the goods and services produced in the Republic. This level is close to what economists believe is sustainable over the long term but well short of the double digit growth seen in the 1999 and 2000.
The ESRI has sounded a warning about inflation, which will remain stubbornly high at 4.2 per cent this year. It now believes inflation is the single biggest threat to the nascent economic recovery.
It argues that the tightness of the public finances has reduced the Government's ability to fight inflation. As a consequence, there is now a significant risk of an inflationary spiral setting in which will "erode many of the significant achievements of the Irish economy in recent years", according to the ESRI.
The main driver of inflation is rising wages and the ESRI has warned that the Government may not be able to engineer a new national wage agreement to try and contain it. The previous agreements - including the current Partnership for Prosperity and Fairness - involved the Government trading tax cuts for moderate wage increases and industrial peace.
According to Mr Danny McCoy of the ESRI, the deterioration in the public finances over the last 12 months means the next Government will be unable to strike such a bargain again. The ESRI says the Government's finances will be €727 million in the red by the end of the year and this will rise to €1.9 billion next year.
This will put the Republic in danger of breaching EU guidelines on how member-states should manage their finances, according to the ESRI. "The need to match public expenditure growth with revenue growth must be reinforced to avoid such an outcome," it concludes in its Quarterly Economic Commentary published today.
The warning echoes sentiments expressed yesterday by IBEC, the business lobby group. The rise in day-to-day spending by the Government over the last two years is "a recipe for disaster", according to IBEC. Government expenditure rose by 22 per cent last year and could increase by a similar rate this year, the body has warned.
IBEC wants vast tranches of the Government to be taken over by the private sector in order to bring down the cost. The areas targeted by IBEC include secretarial services, payroll, maintenance, IT, training and catering. "Some services provided by the State could be better handled by the private sector," said Mr Brendan Butler, IBEC's director of enterprise yesterday at its pre-election briefing.
IBEC, too, expressed concerns about spiralling wages. "Adjusted for inflation, Irish wage rates are rising at seven times the EU average," he said. There is little sign of a let-up with the ESRI forecasting that unemployment will average 4.6 per cent this year after peaking at 5 per cent. This will fall to 4.4 per cent next year, indicating possible labour shortages and pressure on wages in the second half of the year.
Mr Turlough O'Sullivan, IBEC's director general, spelt out some of the issues business would like the political parties to address in the coming election. He cautioned any future government against trying to increase the contributions made by employers towards social welfare insurance.
Labour has already said it will increase employers' PRSI to fund an ambitious childcare package.
IBEC has put a series of questions to each political party and will provide details of the answers to its 7,000 members before the election.